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Here’s What Happens When Bankers Are Tested for Honesty (You Won’t Be Disappointed)

A recent study by Swiss economists finds that the business culture in the banking industry undermines a person’s inclination to be honest.

The banking profession seems to have taken a wrong turn somewhere along the way. According to a recent study published by the scientific journal Nature, "the prevailing business culture in the banking industry weakens and undermines" a person's inclination to be honest.

A study of bankers and honestyA team of Swiss economists came to this conclusion after surveying employees at an undisclosed bank to determine whether they were more or less honest than people in other professions. And while the bankers themselves were not innately more dishonest, they became so after being prompted to discuss their jobs.

In one part of the study, subjects were instructed to flip a coin 10 times. Each time the coin landed on the side requested by a researcher, the subject would be given $20. Consistent with mathematical probabilities, honest people self-report a match about 50% of the time. But in this case, when the subjects were first asked about their profession, which had the effect of placing it at the forefront of their minds, they reported a match 58% of the time.

In another part of the study, the subjects took part in a lab game that asked them about their home life. When the questions weren't preceded by a discussion about banking, the subjects were "about as honest as the general public." However, when the questions were preceded by questions about the subjects' work at the bank, they cheated 16% more frequently.

Based on these results, the economists concluded that there's something about the culture of modern banking that fosters dishonesty:

[W]e show that employees of a large, international bank behave, on average, honestly in a control condition. However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest. This effect is specific to bank employees because control experiments with employees from other industries and with students show that they do not become more dishonest when their professional identity or bank-related items are rendered salient. Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm.

Of course, perhaps the most unfortunate fact about this finding is that it isn't even remotely shocking. After all, during the last 15 years, the nation's biggest banks have been variously accused of:

facilitating fraud at Enron and WorldCom

covering up Bernie Madoff's multibillion-dollar Ponzi scheme

manipulating energy and commodity prices

rigging interest rates and foreign-exchange markets

creating and selling toxic derivatives and mortgage-backed securities

fixing ostensibly neutral credit card arbitration hearings

submitting fraudulent documents in judicial foreclosure proceedings

restructuring the order of their customers' debit-card transactions to maximize overdraft fees, among other things

Thus, the issue isn't so much about whether banks are institutionally dishonest -- referring specifically to JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. We know they are. We have an abundance of evidence to demonstrate that. Rather, the more trenchant question is: Why?

The poisonous influence of tradingWhile it would be naïve to suggest that there is a single, elegant solution to this question, a growing chorus of observers point to the proliferation of proprietary trading and market making at so-called universal banks -- that is, companies that engage in both investment and commercial banking activities.

Nowhere is this more evident than at Goldman Sachs, a company that was long guided by the principle that "our clients' interests always comes first," but has since come to be known for purposely selling toxic derivatives to clients in the lead-up to the financial crisis.

Underlying this drift is the notion that trading entails a different view and definition of clients, says Steven Mandis in What Happened to Goldman Sachs. Consider this quote, cited by Mandis, from Goldman's current chairman and CEO Lloyd Blankfein: "We didn't have the word 'client' or 'customer' at the old J. Aron [the metals trading division where Blankfein worked with Goldman president Gary Cohn for years]. We had counterparties -- and that's because we didn't know how to spell the word 'adversary.'"

The "root of the problem," says Richard Marin, the former head of Bear Stearns' asset management division, is arrogance: "When you become arrogant, in a trading sense, you begin to think that everybody's a counterparty, not a customer, not a client . . . [and] as a counterparty, you're allowed to rip their face off."

And this same view is held by Robert Wilmers, the chairman and CEO of M&T Bank, a regional lender based in upstate New York, and arguably one of the greatest bank executives of the last half century. In his latest letter to shareholders, Wilmers dedicated a lengthy portion to the damage inflicted on the bank industry by the growing influence of trading:

[S]peculative trading activities, whether inside or outside the banking industry, center on making profits from the market by exploiting visibility into customer order flows, taking advantage of market imperfections, obscuring otherwise transparent market prices, and controlling parts of the commerce supply chain. Participants in such activities benefit from longer delivery delays, higher prices, volatility and shortages. What manufacturer or supplier of goods to the real economy does not seek predictable supplies, faster delivery times, and stable prices that ultimately benefit their customers? Suffice it to say that speculative trading activities are at odds with commerce, the facilitation of which is the very function of banking.

In a broader sense, Wilmers' point is that banking, by nature, isn't dishonest; it only becomes so when trading enters the picture, as that fosters an environment in which customers are perceived to be adversaries instead of clients.

The contamination of retail bankingFor most of the last century, the impact of this shifting mentality toward clients was limited to institutional customers of Wall Street banks. This is because Depression-era laws long-forbade the comingling of investment and commercial banking activities. However, thanks to the Financial Services Modernization Act of 1999, this barrier no longer exists. Consequently, today, almost all of the nation's largest banks have active trading operations, as well as large retail footprints.

The significance of this can't be overstated, as, by all appearances at least, cohabitation has allowed the adversarial mind-set of traders to contaminate retail operations at the likes of JPMorgan Chase, Bank of America, and Citigroup. In a strange twist of fate, in fact, the heir apparent to Bank of America's corner office was directly involved with some of Goldman Sachs' shadiest dealings during the crisis. The net result is that ordinary people like you and me are now vulnerable to exploitation every time we apply for a loan or execute a transaction with a debit or credit card.

Will this ever change? Perhaps. In fact, one could argue that the Volker rule, which prohibits federally insured depositary institutions from certain types of proprietary trading, takes strides in the right direction. Though, given the lobbying power of the financial industry coupled with lawmakers' not-unrelated indifference for the well-being of the individual consumer, you probably shouldn't hold your breath.